Producing a Cash Flow Budget

Producing a cash flow budget from your profit and loss budget (see our paper on Developing a Business Budget) is critical to ensure that your business strategies and planned operational activities for the coming budget period are not going to result in over commitment of the company’s cash resources. It will also allow you to determine at particular points within the year excess cash is available to invest in other growth activities or to provide dividends to shareholders. The key differences between your profit and loss budget and your cash flow budget include the following:

Timing of Revenue collection

Though your business budget shows an estimated monthly revenue of say $100,000, your customers may not always pay this on the day they receive the goods or service. Whereas in retail for example, customers pay for the products at the point of collection and the seller receives that cash almost immediately, allowing for variances in bank processing systems, in many businesses invoices are issued to customers following delivery of goods or services and have payment terms anywhere from a couple of days to a couple of months. So effectively your business will see a percentage of the estimated revenue in the month it appears in your budget, some the month after and some the month after that, depending on your particular trading terms. Your cash flow budget therefore needs an estimate of this distribution of payment expectations to apply to the monthly amounts in the budget.

The example below shows how revenue collection could be spread across a 4 month period. Assuming $100,000 per month budgeted revenue for the new financial year period, the amount of cash collected in July will be 30% of revenue budgeted for July (collection estimate in same month 30%), and revenue outstanding from April, May and June that is due to be collected at 30, 60 and 90 days respectively. You can also see how the revenue forecast in the budget for July is collected across July (30%), August (50%), September (15%) and finally October (5%). This logic needs to be applied across all months of the budget and needs to be linked to any amounts outstanding from the previous financial year (April, May and June in the example shown).

Timing of Cost and Expense Payments

The logic used to stagger revenue collection into realistic terms also needs to be applied to your payments to creditors, including wages. As wages are usually paid on a weekly, fortnightly or monthly basis, it’s often easier to allocate these payments in the cash flow to separate lines of wages, PAYG and superannuation so that you can set the frequency of payments in the cash flow to match requirements and keep them out of the equation used to allocate payment schedules to general creditors. An identical table to the one above should be produced allocating the percentage of creditor payments in your budget (pretty much all your cost and expense lines) to the same month as they appear in your budget and the subsequent 2-3 months, again depending on your general terms of trade with your suppliers.

GST and BAS Payments

Revenue and cost/expense budgets do not include GST, however it is a reality for all businesses that Business Activity Statements (BAS) need to be lodged on a regular basis, generally quarterly. This means that in your cash flow you need to estimate these quarterly payments, in your budget you should be able to identify all revenue that will have the 10% GST charge attached (usually 100%) and which costs and expenses also attract 10% GST (remembering that things like wages do not incur GST). Your BAS calculations need to be made on the timing of the collection and payment of your GST (not the months they were budgeted), so need to be estimated from your cash flow forecast not your monthly trading (P&L) budget. If your accountant is preparing your BAS they can help with this, as a rule of thumb following lodgment of your BAS by your accountant payments are due in late Oct for the Jul-Sept quarter, Feb for the Oct-Dec quarter (you get a bit longer because of the Christmas break), Apr for the Jan-Mar quarter and Jul for the Apr-Jun quarter.

Tax Payments or Credits

Another reality of business life is income tax. If your business is profitable, you will be required to pay income tax. These payments usually follow the lodgment of end of financial year accounts (end of March at the latest for the previous financial year) with the ATO. Depending on your tax status, you may also be required to make regular payments throughout the year in anticipation of your estimated annual income tax amount. Your accountant will be able to advise how your income tax is being paid and allow you to add these payments into your cash flow. If your business is not profitable, the amount of tax you will have a negative tax assessment, however this is stored as a credit and not paid as a refund.

If you are performing research and development (R&D) within your business, you may be eligible for a R&D tax refund. In this case, regardless of the profitability of your business, the assessed amount is paid to the business in cash. If you are receiving an R&D tax refund, don’t forget to add this source of additional cash to your cash flow forecast. The timing of this refund is related to the timing of the lodgment of your claim and your accountant will be able to help you with estimating the amount and timing of the refund for you cash flow forecast.

Payment of balance sheet liabilities and capex

Your cash flow forecast needs to include payments that do not appear in your trading (P&L) budget. For example, things like bank loan repayments and equipment finance repayment schedules are recorded on the balance sheet and not in the P&L budget, you need to make sure all your monthly (or other period) commitments are allowed for in the cash flow. Remember, you may not have any flexibility with direct debit payments if cash flow is tight at any particular time of the year, these will be automatically taken from your bank account at the agreed intervals, so planning to skip one in Jan and pay 2 in Feb to keep your account in the black may not work in practice.

It is also helpful if you can allow a single line for each individual loan or finance payment, then it is easier to see that everything has been included correctly. Also, watch out for things like insurance premium funding plans, as they often have 10 monthly payments in a 12 month period, so you will have 2 months of the year when those payments do not have to occur.

Capex, or capital expenditure, will also not usually appear in your P&L budget. These are usually large equipment purchases (such as new vehicles, manufacturing equipment, warehouse racking) or investments in things like major building works or refurbishments. These purchases or investments actually require cash to be paid at the time, and then the asset appears at that value on your balance sheet and is slowly depreciated over a period of time. You need to ensure that your business plan clearly identifies the timing and amount of any capex so you can allow for it in your cash flow.

Shareholder liquidity events

From time to time, shareholders of a business may expect to receive dividends, if the business is sufficiently profitable. On the other hand, shareholders may be required to put money into the business if cash is short, or large growth projects are planned that require additional capital investment that is not being sourced through external financiers (banks). Your cash flow forecast needs to allow for these planned cash movements to ensure that shareholders and management have a clear view of how these increases or decreases in cash availability will impact general trading cash requirements.

If your cash flow forecast covers the points listed above, you should be fairly confident that these are no more surprises that will significantly impact your cash flow. Of course, you need to monitor the trading performance of the business and any changes in decisions about the timing of things like capex throughout the year and make adjustments to your cash flow to ensure that you do not find yourself suddenly facing a cash flow crisis.

If your business is facing a cash flow crisis or you require any further information about any of the solutions outlined above please contact us and we will be happy to help connect you with an appropriate provider in your area or discuss in more detail short and long term solutions that may be available to your business.